In November 2023 the Supreme Court of Illinois held that construction defects caused by a subcontractor using defective materials, conducting faulty workmanship, and failing to comply with building codes causing defects in a residential townhome development is an “accident” under the policy and therefore an “occurrence”. There are lessons to be learned.
The commercial general liability policy covering the contractor and subcontractor insured “property damage caused by an occurrence”. An occurrence was defined as “an accident”. The term “accident” was not defined in the policy and the court applied what it said was the plain and ordinary popular meaning with reference to a reasonable person. Using the broadest definitions of “accident” in previous cases and dictionaries, the court found that the term “accident” in the policy reasonably encompassed the unintended and unexpected harm caused by negligent conduct. The subcontractors had not intentionally performed substandard work according to the allegation in the documents. The defective work resulted in water damage to the interior of completed units. This was held to constitute “physical injury to tangible property” for the purposes of the policy. Therefore, under the wording of the policy, the construction defects that resulted in property damage to the completed project were covered on the facts relied on.
A policy exclusion for property damage to “that particular part of any property that may be restored, repaired or replaced because your work was incorrectly performed on it” included an exception for property damage “when all of the work called for in your contract has been completed”. Therefore the consequences of the defective work could be covered.
This case shows how carefully words need to be used. There are many cases extending the meaning of “accident” to all sorts of unexpected events and losses. A tight definition in the policy is needed. If defective workmanship is to be excluded, it should be specifically excluded and it must be made clear what the “resultant damage” is that will be covered.